Thursday, June 7, 2018

Finance Commission 3



Thirteenth FC (under Vijay Kelkar) Recommendations   

 Sharing of Union tax revenues   

      The share of states in net proceeds of shareable central taxes shall be 32 per cent in each of the financial years from 2010-11 to 2014-15

      The share of each state in the proceeds of all shareable central taxes in each of the financial years from 2010-11 to 2014-15 shall be as specified   

i. Finances of Union and States   

a. Actual share in the tax revenue of the Centre which is devolved to states       The Eleventh and Twelfth Commissions had recommended that the share of states be fixed at 29.5% and 30.5% respectively, of central taxes. However, the actual shares devolved to states have been lower than recommended by previous finance commissions.

Recommendation       The Ministry of Finance should ensure that the accounts reflect all collections so that there are no inconsistencies in the amounts released to states

b. Losses in the power sector       Subsidy for the power sector is the largest component of state government subsidies. The power sector in most states is beset with high losses, and inefficient infrastructure, resulting in huge losses. Recommendation       Losses in the power sector are expected to be a major drag on the finances of State Governments, and therefore, the problems confronting this sector need to be addressed in a time-bound manner

Reduction of centrally sponsored schemes       Initiatives should be taken to reduce the number of Centrally Sponsored Schemes and to restore the predominance of fund-transfers based on Planning Commission recommendations

 Goods and Services Tax (GST)   

The Commission has recommended the adoption of the GST and formulated a model GST. The main features of the model GST are   

      The central portion of the GST would include (a) central excise duties, (b) service tax, (c) additional customs duties,

(d) all surcharges and cesses.

      The state GST would include (a) VAT, (b) central sales tax, (c) cesses and surcharges, and others such as luxury tax, lottery tax, stamp duties, etc.

      There would be special provisions for certain goods such as petroleum, and exemptions would be allowed only on the basis of a common list applicable to all states and the centre.

      GST should be implemented by all states and the centre at the same time.

      To provide incentives to states to agree to the model GST, the Commission has recommended the implementation of a Grand Bargain. The Grand Bargain envisages a grant of a total of Rs. 50,000 crore to be provided to all states. This amount would be distributed among states subject to the model GST framework being adopted by all states. This grant would be used to compensate states for revenue losses on account of implementing GST. This amount should not be distributed if states cannot reach a consensus on implementing GST.

      The Empowered Committee of State Finance Ministers (EC) should be given statutory status. The compensation should be disbursed in quarterly instalments on the basis of recommendations by a three-member Compensation Committee. The Compensation Committee should comprise of the Secretary, Department of Revenue of the central government, Secretary to the EC, and an eminent person with experience in public finance



 Union Finances

The central government has recently decided that proceeds from disinvestment shall be used fully as capital expenditure for social sector programmes. This policy needs to be liberalised and proceeds should also be used for augmenting critical infrastructure and environment related projects.

 State Finances

      The practice of diverting plan assistance to meet non-plan needs of special category states should be discontinued.

      For PSUs   

       All accounts and backlogs of PSU accounts should be cleared by states.

       States need to draw a roadmap for closure of nonworking PSUs by March 2011. Divestment and privatisation of PSUs should be considered and actively pursued.

      Power Sector   

       Reduction of Transmission and Distribution (T&D) losses should be attempted.

       Unbundling needs to be carried out on priority basis and open access to transmission strengthened.

       Proper systems should be put in place to avoid delays in completion of hydro projects.

       Regulatory institutions should be strengthened through capacity building, consumer education and tariff reforms.

      Regarding reforms in the area of pensions, a switch to the New Pension Scheme needs to be completed at the earliest.



 Revised roadmap for fiscal consolidation       i. Central government

       The revenue deficit of the Centre needs to be progressively reduced and eliminated, followed by emergence of a revenue surplus by 2014-15.

       A target of 68 percent of GDP for the combined debt of the centre and states should be achieved by 2014-15.

       The Medium Term Fiscal Plan should be reformed and made a statement of commitment rather than a statement of intent.

       The government should list all public sector enterprises that yield a lower rate of return on assets than a norm which should be decided by an expert committee.

       An independent review mechanism should be setup by the Centre to evaluate its fiscal reform process.





ii. State governments   

       States should be able to get back to the path of fiscal consolidation after the disruption caused in 2008-09 and 2009-10. States with zero revenue deficit or revenue surplus in 2007-08 should eliminate revenue deficit by 2011-

12. Other states should do so by 2014-15.

       General category states with zero revenue deficit in 2007-08 should achieve a fiscal deficit of 3 percent of GDP by 2011-12. Other states should do so by 2013-14.

       States should amend/enact Fiscal Responsibility and Budget Management Acts to build on the fiscal reform path worked out.



       State-specific grants recommended for a state should be released upon compliance. Borrowing limits for states to be worked out by Finance Ministry using the fiscal reform path, thus acting as an enforcement mechanism for fiscal correction by states.






Fourteenth FC   

The Fourteenth Finance Commission has been set up under the Chairmanship of Dr. Y.V.Reddy [Former Governor, Reserve Bank of India]. The Finance Commission is required to give its report by 31st October, 2014. Its recommendations will cover the five year period commencing from 1st April, 2015. Its terms of reference include   

      review the state of the finances, deficit and debt levels of the Union and the States, keeping in view, the fiscal consolidation roadmap recommended by the Thirteenth Finance Commission, and suggest measures for maintaining a stable and sustainable fiscal environment consistent with equitable growth

      the level of subsidies that are required, having regard to the need for sustainable and inclusive growth, and equitable sharing of subsidies between the Central Government and State Governments

      the need for making the public sector enterprises competitive and market oriented; listing and disinvestment; and relinquishing of non-priority enterprises







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